Inflation – how to tackle it

June 26, 2008

One of the most repeatedly asked question by anybody is – how to tackle this devil which has grown in gigantic proportions?

Most people are unaware of what it is and how it affects them but one thing is for sure, the media has beamed this bad news so continiously that people are more scared than ever. Worse is the situation when we dont know what we are scared off!!

Inflation is simply put as excess money in the country which is chasing few goods. This could be because of prouduction not sufficient or because of too much money with people – net result is the purchasing power of rupees comes down – this is something everybody understands!

Inflation is a essential devil. 3% to 4% is essential for the economic growth of the country but 11% to 14% as of now will hurt the poorest of the poor by reducing their purchasing power while their incomes dont raise proportionately.

The poor man tightens the belt, luxury items are no more purchased, essentials are rationed and the comman man will suffer.

If there is some savings – the retired people etc who have invested in risk averse things like bank FD’s are in for shock as they get negetive returns. Actually the interest paid on FD’s is to give atleast 2% over and above inflation so that your capital remains intact. What reteired people think is that my capital is intact and am living off on the interest portion – WRONG!!!

In current scenario when inflation is at 12% to 14%, your bonds/ FD’s dont give more than 9.75%. This difference is called negetive growth and if it continues for more than 2 years, its a dangerous situation.

So what should common man do for all these – more so the retired people?

Industry experts point out that Gold was one time tested hedging mechanisum but historicaly in the last 20 years, this has not provided very good results. In fact its too much of a risk for common man to purchase, store and sell the same.

Equities are the only life saving mechanisum to beat this devil called inflation. At times of inflation, the corporates increase the cost of products and pass it on to the consumer. But as a owner of the concern you would also be protected as growth would be in line with inflation.  Choose a mutual fund ( balanced one) so that you invest systamatically initially.

RISK is something that needs to be taken for the long term. A pensioner is advised to part 80% in fixed income instruments but 20% should be in equities commited for 7 to 10 years. The growth of this 20% in equities should make the average man break even.

Modern times bring on modern risks and knowledge of the correct nature is imperative to sustain!!